Institutional Foundations of Financial Power 5 set of"selectors."2 Bueno de Mesquita and Siverson take a different approach, suggesting that democratic leaders have an incentive to select wars in which they have a high expected probability of winning;in this view,the correlation between democracy and victory reflects the selection process and not necessarily an inher- ent war-fighting superiority.13 We contribute to this literature by showing that institutional features generally associated with liberal democratic states provide a significant advantage in pro- longed international competition.The argument builds on previous research high- lighting the crucial role of financial power in determining the outcomes of conflicts such as those listed in Table 1.14 It has long been appreciated that money forms the "sinews of power."The victorious state in protracted competition is generally the one that can sustain a superior military effort-in war and peace-over a pe- riod of many decades,without succumbing to political and economic exhaustion. We argue that it is no coincidence that,over the past four centuries,states with representative,limited governments have been particularly successful in this respect. Although such governments may at times suffer from the constraints placed on their leaders,these constraints also provide the political foundations for financial power.Building on literature on sovereign debt,we show that representative insti- tutions enhance a state's borrowing power by making it easier for those with a stake in the repayment of debt to punish the sovereign in the event of default.15 The commitment technology provided by these institutions means that states pos- sessing them have superior access to credit than states that are not similarly con- strained.6 As a result,liberal states are better able to finance large wars and long arms races that require expenditures well in excess of normal receipts.Moreover, easy access to credit facilitates a policy of "tax smoothing,"whereby sharp in- creases in spending are financed through debt rather than through onerous tax in- creases.As economists emphasize,tax smoothing provides considerable advantages over the long run,lowering distortions in the economy and promoting invest- ment.17 These advantages are particularly useful for lowering the social and eco- nomic burden of sudden rises in expenditures associated with large wars.Thus institutions of limited government underpin a financial system that is capable of sustaining large expenditures on military competition in a manner that is consis- tent with long-term economic growth. We illustrate the effects of these institutions by looking at two cases of compe- tition between a liberal and an illiberal state:the rivalry between Britain and France from 1689 to 1815 and the Cold War between the United States and the Soviet 12.Bueno de Mesquita et al.1999. 13.Bueno de Mesquita and Siverson 1995.See Reed and Clark 2000 for a comparison of explana- tions building on war-fighting prowess and explanations building on strategic selection. 14.Rasler and Thompson 1983;see also Kennedy 1987;Brewer 1988;and Gilpin 1981. 15.Eaton,Gersovitch,and Stiglitz 1986;see also Bulow and Rogoff 1989;Conklin 1998. 16.North and Weingast 1989. 17.Barro 1979;see also Lucas and Stokey 1983.Institutional Foundations of Financial Power 5 set of selector^."'^ Bueno de Mesquita and Siverson take a different approach, suggesting that democratic leaders have an incentive to select wars in which they have a high expected probability of winning; in this view, the correlation between democracy and victory reflects the selection process and not necessarily an inher￾ent war-fighting superiority.I3 We contribute to this literature by showing that institutional features generally associated with liberal democratic states provide a significant advantage in pro￾longed international competition. The argument builds on previous research high￾lighting the crucial role of financial power in determining the outcomes of conflicts such as those listed in Table l.14 It has long been appreciated that money forms the "sinews of power." The victorious state in protracted competition is generally the one that can sustain a superior military effort-in war and peace-over a pe￾riod of many decades, without succumbing to political and economic exhaustion. We argue that it is no coincidence that, over the past four centuries, states with representative, limited governments have been particularly successful in this respect. Although such governments may at times suffer from the constraints placed on their leaders, these constraints also provide the political foundations for financial power. Building on literature on sovereign debt, we show that representative insti￾tutions enhance a state's borrowing power by making it easier for those with a stake in the repayment of debt to punish the sovereign in the event of default.15 The commitment technology provided by these institutions means that states pos￾sessing them have superior access to credit than states that are not similarly con￾strained.I6 As a result, liberal states are better able to finance large wars and long arms races that require expenditures well in excess of normal receipts. Moreover, easy access to credit facilitates a policy of "tax smoothing," whereby sharp in￾creases in spending are financed through debt rather than through onerous tax in￾creases. As economists emphasize, tax smoothing provides considerable advantages over the long run, lowering distortions in the economy and promoting invest￾ment.'' These advantages are particularly useful for lowering the social and eco￾nomic burden of sudden rises in expenditures associated with large wars. Thus institutions of limited government underpin a financial system that is capable of sustaining large expenditures on military competition in a manner that is consis￾tent with long-term economic growth. We illustrate the effects of these institutions by looking at two cases of compe￾tition between a liberal and an illiberal state: the rivalry between Britain and France from 1689 to 1815 and the Cold War between the United States and the Soviet 12. Bueno de Mesquita et al. 1999. 13. Bueno de Mesquita and Siverson 1995. See Reed and Clark 2000 for a comparison of explana￾tions building on war-fighting prowess and explanations building on strategic selection. 14. Rasler and Thompson 1983; see also Kennedy 1987; Brewer 1988; and Gilpin 1981. 15. Eaton, Gersovitch, and Stiglitz 1986; see also Bulow and Rogoff 1989; Conklin 1998. 16. North and Weingast 1989. 17. Barro 1979; see also Lucas and Stokey 1983